MNI: US Treasury’s Frost Sees Liquidity Boost From Buybacks

The U.S. Treasury's new program to buy back selected government bonds should help boost liquidity and resilience in the world’s most important debt market, Treasury Assistant Secretary for Financial Markets Joshua Frost said Wednesday.

“Treasury expects liquidity improvements resulting from buybacks to flow through three channels,” he said in prepared remarks. (See MNI INTERVIEW: Reforms Aid Brittle Treasury Market-SEC's Ghamami)

“First, dealers should feel more confident making markets in off-the-run securities, as they will have Treasury as a regular and predictable buyer. Second, Treasury buybacks are expected to be 'liquidity events' around which additional trading activity is likely to take place. And third, dealers may use buyback operations to free up balance sheet allocated to less-liquid positions at a fair price.”

The Treasury last month announced the buyback plans in conjunction with the latest quarterly refunding announcement, and authorities conducted the first buyback operation in May.

PRICE-SENSITIVE BUYER

“Treasury conducted its first regular buyback operation in the four-week to two-year nominal coupon sector. This first operation garnered considerable interest from primary dealers with highly competitive offers and results consistent with Treasury’s liquidity support goals,” Frost said.

“Treasury also completed its second regular buyback operation in the 20-year to 30-year nominal coupon sector earlier this afternoon.”

Frost said Treasury intends to be a “price sensitive buyer” as it conducts ongoing operations.

“We may buy back less than the stated maximum, or nothing at all, in any operation depending upon the quality of offers that we receive. We will evaluate the offers we receive based on their proximity to prevailing market prices at the close of the operation, as well as measures of relative value,” he said.